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To: GST who wrote (74478)	8/18/1999 5:23:00 PM
From: Glenn D. Rudolph	Respond to of 164685

ANALYSIS-Southern Europe may pay for euro pricing By Kevin Drawbaugh, European Consumer Goods Correspondent LONDON, Aug 18 (Reuters) - Inflation in Europe's lowest-cost countries in the south, like Spain, Portugal and Greece, is beginning to get an unwelcome boost from efforts by big consumer goods groups to narrow regional price differentials. Recent studies have shown the process, known as price convergence, is gaining speed ahead of the 2002 launch of euro coins and notes -- with worrisome consequences for southern economies that can ill afford added inflation. "It is already very apparent that countries with relatively low goods and services prices are seeing considerably more rapid inflation than those with relatively high prices," said Julian Callow, European economist at Dresdner Kleinwort Benson. Data released last week showed year-on-year July consumer price inflation in Spain and Portugal running at 2.2 and 2.1 percent, respectively -- more than double the euro-zone average. Higher energy prices and a tourism boom partly explain the gap, but economists said there was also an emerging price convergence effect that could bring upward pressure on prices at the retail and wholesale levels for some time to come. "If convergence is to proceed further, then there will be significant differences in regional inflation rates," said Callow, who forecast consumer prices in Spain rising by 15 percent over the next three years while German prices fall by 10 percent or so over the same period. From cars and computers to toothpaste and tea bags, the goods involved in price convergence span the spectrum of consumer needs and still often have wildly variable prices from one market to another, both in and out of the 11-nation euro zone. A recent nine-country Dresdner study of 129 consumer items found a 1.5-litre bottle of Evian water cost 0.53 euros in Rome and 1.53 euros in Stockholm; a jar of Miracle Whip mayonnaise cost 0.92 euros in Madrid but 1.58 euros in London. A KPMG Consulting study found the average price gap on a list of 33 of Europe's most common products -- from chicken to compact discs -- was 57 percent between the 11-member euro zone's costliest and cheapest countries. In response to growing public outrage about these differences and in line with larger economic forces, manufacturers are starting to squeeze their prices into narrower ranges, within the constraints of competitive pressures. "For many products, it's in southern Europe where you find the lowest prices," said McKinsey & Co. consultant Nicklas Garemo. "So unless manufacturers want to dramatically reduce their (profit) margins -- which they don't -- they will have to increase prices in southern Europe to compensate for lower prices in other countries." Garemo points to German car builder Volkswagen <VOWG.F> unit Audi, which over three years has narrowed the price range for its A6 sedan, leading to price hikes in Spain. "If you look at the Mercedes <DCXGn.F> 320, they've adjusted prices upward in Spain and Italy," Garemo said. Switzerland's Nestle <NESZn.S>, the world's largest food company, confirmed it is converging prices for a few goods that are identical across markets. "The prices will be somewhere between the higher prices and the lower prices, but probably very near to the lower prices," a spokesman said. Other companies squeezing price differentials across the continent include German sports shoe maker Adidas Salomon <ADSG.DE> and U.S. software giant Microsoft Corp <MSFT.O>. Convergence is being driven by several factors and got started a decade ago with EU single-market reforms. But the overriding force behind it is the coming January 2002 debut of coins and notes denominated in euros -- the shared European currency that is currently only used in financial markets. When businesses and consumers start buying and selling every day in euros economists expect price transparency wil...